Articles / News
Source: Michael E. Porter
What is Strategy?
OPERATIONAL EFFECTIVENESS IS NOT STRATEGY
For almost two decades, managers have been learning to play by a new set of rules. Companies must be flexible to respond rapidly to competitive and market changes. They must benchmark continuously to achieve best practice. They must outsource aggressively to gain efficiencies. And they must nurture a few core competencies in the race to stay ahead of rivals.
Positioning - once the heart of strategy - is rejected as too static for today's dynamic markets and changing technologies. According to the new dogma, rivals can quickly copy any market position, and competitive advantage is, at best, temporary.
But those beliefs are dangerous half-truths, and they are leading more and more companies down the path of mutually destructive competition. True, some barriers to competition are falling as regulation eases and markets become global. True, companies have properly invested energy in becoming leaner and more nimble. In many industries, however, what some call hyper competition is a self-inflicted wound, not the inevitable outcome of a changing paradigm of competition.
The root of the problem is the failure to distinguish between operational effectiveness and strategy. The quest for productivity, quality, and speed has spawned a remarkable number of management tools and techniques: total quality management, benchmarking, time-based competition, outsourcing, partnering, reengineering, change management. Although the resulting operational improvements have often been dramatic, many companies have been frustrated by their inability to translate those gains into sustainable profitability.
And bit by bit, almost imperceptibly, management tools have taken the place of strategy. As managers push to improve on all fronts, they move farther away from viable competitive positions.
Operational Effectiveness: Necessary but Not Sufficient
Operational effectiveness and strategy are both essential to superior performance, which, after all, is the primary goal of any enterprise. But they work in very different ways.
Operational effectiveness (OE) means performing similar activities better than rivals perform them. Operational effectiveness includes but is not limited to efficiency. It refers to any number of practices that allow a company to better utilise its inputs by, for example, reducing defects in products or developing better products faster. In contrast, strategic positioning means performing different activities from rivals' or performing similar activities in different ways.
For at least the past decade, managers have been preoccupied with improving operational effectiveness. Through programs such as TQM, time-based competition, and benchmarking, they have changed how they perform activities in order to eliminate inefficiencies, improve customer satisfaction, and achieve best practice. Hoping to keep up with shifts in the productivity frontier, managers have embraced continuous improvement, empowerment, change management, and the so-called learning organisation.
As companies move to the frontier, they can often improve on multiple dimensions of performance at the same time.
Constant improvement in operational effectiveness is necessary to achieve superior profitability. However, it is not usually sufficient. Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day. The most obvious reason for that is the rapid diffusion of best practices. Competitors can quickly imitate management techniques, new technologies, input improvements, and superior ways of meeting customers' needs. The most generic solutions - those that can be used in multiple settings - diffuse the fastest. Witness the proliferation of OE techniques accelerated by support from consultants.
OE competitions shift the productivity frontier outward, effectively raising the bar for everyone. But although such competition produces absolute improvement in operational effectiveness, it leads to relative improvement for no one. Consider the $5 billion-plus U.S. commercial-printing industry. The major players - R.R. Donnelly & Sons Company, Quebecor, World Colour Press, and Big Flower Press - are competing head to head, serving all types of customers, offering the same array of printing technologies , investing heavily in the same new equipment, running their presses faster, and reducing crew sizes. But the resulting major productivity gains are being captured by customers and equipment suppliers, not retained in superior profitability.
The second reason that improved operational effectiveness is insufficient - competitive convergence - is more subtle and insidious. The more benchmarking companies do, the more they look alike. The more that rivals outsource activities to efficient third parties, often the same ones, the more generic those activities become. As rivals imitate one another's improvements in quality, cycle times, or supplier partnerships, strategies converge and competition becomes a series of races down identical paths that no one can win. Competition based on operational effectiveness alone is mutually destructive, leading to wars of attrition that can be arrested only by limiting competition.
After a decade of impressive gains in operational effectiveness, many companies are facing diminishing returns. Continuous improvement has been etched on managers' brains. But its tools unwittingly draw companies toward imitation and homogeneity. Gradually, managers have let operational effectiveness supplant strategy. The result is zero-sum competition, static or declining prices, and pressures on costs that compromise companies' ability to invest in the business for the long term.
STRATEGY RESTS ON UNIQUE ACTIVITIES
Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.
Ikea, the global furniture retailer based in Sweden, also has a clear strategic positioning. Ikea targets young furniture buyers who want style at low cost. What turns this marketing concept into a strategic positioning is the tailored set of activities that make it work.
Consider the typical furniture store. Showrooms display samples of the merchandise. One area might contain 25 sofas; another will display five dining tables. But those items represent only a fraction of the choices available to customers. Dozens of books displaying fabric swatches or wood samples or alternate styles offer customers thousands of product varieties to choose from. Salespeople often escort customers through the store; answering questions and helping them navigate this maze of choices. Once a customer makes a selection, the order is relayed to a third-party manufacturer. With luck, the furniture will be delivered to the customer's home within six to eight weeks. This is a value chain that maximises customisations and service but does so at high cost.
In contrast, Ikea serves customers who are happy to trade off service for cost. Instead of having a sales associate trail customers around the store, Ikea uses a self-service model based on clear, in store displays. Rather than rely solely on third-party manufacturers, Ikea designs its own low-cost, modular, read-to-assemble furniture to fit its positioning. In huge stores, Ikea displays every product it sells in room-like settings, so customers don't need a decorator to help them imagine how to put the pieces together. Adjacent to the furnished showrooms is a warehouse section with the products in boxes on pallets. Customers are expected to do their own pickup and delivery, and Ikea will even sell you a roof rack for your car that you can return for a refund on your next visit.
Although much of its low-cost position comes from having customers 'do it themselves,' Ikea offers a number of extra services that its competitors do not. In-store child care is one. Extended hours are another. Those services are uniquely aligned with the needs of its customers, who are young, not wealthy, likely to have children (but no nanny), and, because they work for a living, have a need to shop at odd hours.
A SUSTAINABLE STRATEGIC POSITION REQUIRES TRADE-OFFS
Choosing a unique position, however, is not enough to guarantee a sustainable advantage. A valuable position will attract imitation by incumbents, who are likely to copy it in one of two ways.
First, a competitor can reposition itself to match the superior performer. J.C. Penney, for instance, has been repositioning itself from a Sears clone to a more upscale, fashion-oriented, soft-goods retailer. A second and far more common type of imitation is straddling. The straddler seeks to match the benefits of a successful position while maintaining its existing position. It grafts new features, services, or technologies onto the activities it already performs.
For those who argue that competitors can copy any market position, the airline industry is a perfect test case. It would seem that nearly any competitor could imitate any other airline's activities. Any airline can buy the same planes, lease the gates, and match the menus and ticketing and baggage handling services offered by other airlines.
Continental Airlines saw how well Southwest was doing and decided to straddle. While maintaining its position as a full-service airline, Continental also set out to match Southwest on a number of point-to-point routes. The airline dubbed the new service Continental Lite. It eliminated meals and first-class service, increased departure frequency, lowered fares, and shortened turnaround time at the gate. Because Continental remained a full-service airline on other routes, it continued to use travel agents and its mixed fleet of planes and to provide baggage checking and seat assignments.
But a strategic position is not sustainable unless there are trade-offs with other positions. Trade-offs occur when activities are incompatible. Simply put, a trade-off means that more of one thing necessitates less of another. An airline can choose to serve meals - adding cost and slowing turnaround time at the gate - or it can choose not to, but it cannot do both without bearing major inefficiencies.
Trade-offs create the need for choice and protect against repositioners and straddlers. Consider Neutrogena soap. Neutrogena Corporation's variety-based positioning is built on a “kind to the skin,” residue-free soap formulated for pH balance. With a large detail force calling on dermatologists, Neutrogena's marketing strategy looks more like a drug company's than a soap maker's. It advertises in medical journals, sends direct mail to doctors, attends medical conferences, and performs research at its own Skincare Institute. To reinforce its positioning, Neutrogena originally focussed its distribution on drugstores and avoided price promotions. Neutrogena uses a slow, more expensive manufacturing process to mould its fragile soap.
In choosing this position, Neutrogena said no to the deodorants and skin softeners that many customers desire in their soap. It gave up the large-volume potential of selling through supermarkets and using price promotions. It sacrificed manufacturing efficiencies to achieve the soap's desired attributes. In its original positioning, Neutrogena made a whole raft of trade-offs like those, trade-offs that protected the company from imitators.
As we return to the question, What is strategy? We see that trade-offs add a new dimension to the answer. Strategy is making trade-offs in competing. The essence of strategy is choosing what not to do. Without trade-offs, there would be no need for choice and thus no need for strategy. Any good idea could and would be quickly imitated. Again, performance would once again depend wholly on operational effectiveness.
FIT DRIVES BOTH COMPETITIVE ADVANTAGE AND SUSTAINABILITY
Positioning choices determine not only which activities a company will perform and how it will configure individual activities but also how activities relate to one another. While operational effectiveness is about achieving excellence in individual activities, or functions, strategy is about combining activities.
Fit and Sustainability
Strategic fit among many activities is fundamental not only to competitive advantage but also to the sustainability of that advantage. It is harder for a rival to match an array of interlocked activities than it is merely to imitate a particular sales-force approach, match a process technology, or replicate a set of product features. Positions built on systems of activities are far more sustainable than those built on individual activities.
What is strategy? We can now complete the answer to this question. Strategy is creating fit among a company's activities. The success of a strategy depends on doing many things well - not just a few - and integrating among them. If there is no fit among activities, there is no distinctive strategy and little sustainability. Management reverts to the simpler task of overseeing independent functions, and operational effectiveness determines an organisation's relative performance.
REDISCOVERING STRATEGY
The Failure to Choose
Why do so many companies fail to have a strategy? Why do managers avoid making strategic choices? Or, having made them in the past, why do managers so often let strategies decay and blur?
Commonly, the threats to strategy are seen to emanate from outside a company because of changes in technology or the behaviour of competitors. Although external changes can be the problem, the greater threat to strategy often comes from within. A sound strategy is undermined by a misguided view of competition, by organisational failures, and, especially, by the desire to grow.
Managers have become confused about the necessity of making choices. When many companies operate far from the productivity frontier, trade-offs appear unnecessary. It can seem that a well-run company should be able to beat its ineffective rivals on all dimensions simultaneously. Taught by popular management thinkers that they do not have to make trade-offs, managers have acquired a macho sense that to do so is a sign of weakness.
Unnerved by forecasts of hyper competition, managers increase its likelihood by imitating everything about their competitors. Exhorted to think in terms of revolution, managers chase every new technology for its own sake.
The pursuit of operational effectiveness is seductive because it is concrete and actionable. Caught up in the race for operational effectiveness, many managers simply do not understand the need to have a strategy.
The Role of Leadership
The challenge of developing or re-establishing a clear strategy is often primarily an organisational one and depends on leadership. With so many forces at work against making choices and trade-offs in organisations, a clear intellectual framework to guide strategy is a necessary counterweight. Moreover, strong leaders willing to make choices are essential.
In many companies, leadership has degenerated into orchestrating operational improvements and making deals its core is strategy: defining and communicating uniqueness and purpose, making trade-offs, and forging fit among activities. The leader must provide the discipline to decide what we will respond to, while avoiding organisational distractions. Managers at lower levels lack the perspective and the confidence to maintain a strategy. One of the leader’s jobs is to teach others in the organisation about strategy-and to say no.
Strategy renders choices about what not to do as important as choices about what to do. Indeed, setting limits is another function of leadership. Thus strategy requires constant discipline and clear communication. Indeed, one of the most important functions of an explicit, communicated strategy is to guide employees in making choices that arise because of trade-offs in their individual activities and in day-to-day decisions.
Improving operational effectiveness is a necessary part of management, but is not strategy. In confusing the two, managers have unintentionally backed into a way of thinking about competition that is driving many industries toward competitive convergence, which is in no one’s best interest and is not inevitable.
Managers must clearly distinguish operational effectiveness from strategy. Both are essential, but the agendas are different.
The operational agenda involves continual improvement everywhere there are no trade-offs. Failure to do this creates vulnerability even for companies with a good strategy. The operational agenda is the proper place for constant change, flexibility, and relentless efforts to achieve best practice. In contrast, the strategic agenda is the right place for defining a uniqueness, making clear trade-offs, defining directions and tightening fit. It involves the continual search for ways to reinforce and extend the company’s position. The strategic agenda demands discipline and continuity; its enemies are distraction and compromise.
Michael E. Porter is the C. Roland Christensen Professor of Business Administration at the
Harvard Business School in Boston, Massachusetts.
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